'Goldman Secretly Bet on the U.S. Housing Crash,' But Few Are Shocked

A barnstorming report from McClatchy Newspapers's Greg Gordon alleges that Goldman Sachs kept selling mortgage-backed securities even as the firm made huge bets against them. As Gordon explains,

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

This could be a substantial charge amid all the populist outrage, conspiracy mongering, and muted defenses of Goldman. For one thing, the secret hedge shows that the firm knew the securities were trash. Some argue that securities laws would have required disclosure of the position. Most pundits, however, are taking the news in stride.

Interesting, But Not What Interests Me Popular business blogger and former Goldman employee Yves Smith says this general line of inquiry is not new, but the report "delves into some details that have heretofore not been examined, as to
how much subprime paper it dumped onto investors during this period,
whether this duplicity was permissible, and what sort of damage was
visited on foolhardy borrowers." But she says the report is short on "nitty gritty," which is the part that interests her: "my understanding is that any simple subprime index short [the alleged bet against the housing market,] would have blown out spreads and thus been very costly to execute."

Not True John Carney, longtime opponent of the Goldman conspiracy theories, is not changing his position: "Far from being 'secretly' down on the US housing market," he writes at The Business Insider, "very early on
Goldman was publicly and privately warning that home prices would
decline and that this decline would have an impact on mortgage backed
securities." This means, Carney argues, that "these latest charges that Goldman was somehow misleading those who invested in mortgage backed securities are simply bunk."

Very True, and Very New Carney completely misses the point, argues the Columbia Journalism Review's Dean Starkman: "[T]he point wasn’t, as ... whether Goldman publicly
warned about the state of the U.S. housing market, which it did. The
point is what Goldman and Wall Street knew about the specific state of
the loans it was buying and reselling, as yesterday’s McLatchy story
makes clear."

Wrong Focus: 'They're All Scoundrels' "There's no question," says BooMan at the Booman Tribune blog, "that Goldman did the best job of hedging against a housing market collapse." Nor does he deny that their ties to Hank Paulson helped them. But in most Goldman discussions there is a minority opinion that "[s]pending too much time focusing on Goldman risks letting everyone else off the hook." BooMan articulates the argument particularly cleanly:

The reason Goldman was comparatively healthy may have been because they
were more clear-eyed than others about the crap they were selling in
the bundled mortgage market, and they hedged against it earlier and
more thoroughly than others. That doesn't make them more guilty, in my
view. It only makes them look worse. All of these firms knew that they
were selling AAA-rated products as safe investments that they knew to
be virtually worthless. The difference is that Goldman [took] steps to
protect themselves.

The whole scheme was a form of legalized
thievery and fraud. Some of it was illegal. All of it should be illegal
after Congress completes its work on regulating the financial markets.
But it's become kind of a fad to conjure up conspiracy theories about
Goldman Sachs and their influence on the inside of government ... Spending too much time focusing on Goldman risks letting everyone else off the hook. They're all scoundrels.

This article is from the archive of our partner The Wire.

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